Chapter 2: Opportunity Recognition
CHAPTER 2
RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS
LEARNING OBJECTIVES
1. / Explain why it’s important to start a new firm when its “window of opportunity” is open.2. / Explain the difference between an opportunity and an idea.
3. / Describe the three general approaches entrepreneurs use to identify opportunities.
4. / Identify the four environmental trends that are most instrumental in creating business opportunities.
5. / List the personal characteristics that make some people better at recognizing business opportunities than others.
6. / Identify the five steps in the creative process.
7. / Describe the purpose of brainstorming and its use as an idea generator.
8. / Describe how surveys are used to generate new business ideas.
9. / Explain the purpose of maintaining an idea bank.
10. / Describe three steps for protecting ideas from being lost or stolen.
CHAPTER OVERVIEW
This chapter begins by describing the difference between an opportunity and an idea. Students are reminded that many firms fail, not because the entrepreneurs involved didn’t work hard, but because there was no real opportunity to begin with. The four components of a favorable opportunity (attractive, durable, timely, and anchored in a product, service, or business that adds value) are then discussed.
The middle of the chapter focuses on the three primary ways that entrepreneurs discover opportunities: by studying environmental trends, solving a problem, or finding gaps in the marketplace. This material is followed by a discussion of the personal characteristics of entrepreneurs that heighten their ability to recognize business opportunities. The chapter then transitions to talking about techniques that can help entrepreneurs come up with new business or product ideas. The techniques introduced include brainstorming, focus groups, surveys, and an assortment of other techniques.
The chapter ends by talking about how to build an organization that encourages and protects new ideas. The section onprotecting ideas from being lost or stolen is particularly interesting.
CHAPTER OUTLINE
I.Identifying and Recognizing Opportunities
A. Observing Trends
1. Economic Forces
2. Social Forces
3. Technological Advances
4. Political Action and Regulatory Changes
B. Solving a Problem
C. Finding Gaps in the Marketplace
D. Personal Characteristics of the Entrepreneur
1. Prior Experience
2. Cognitive Factors
3. Social Networks
4. Creativity
a. Preparation
b. Incubation
c. Insight
d. Evaluation
e. Elaboration
II.Techniques for Generating Ideas
- Brainstorming
- Focus Groups
- Surveys
- Other Techniques
III.Encouraging and Protecting New Ideas
- Establishing a Focal Point for Ideas
- Encouraging Creativity at the Firm Level
- Protecting Ideas from Being Lost or Stolen
CHAPTER NOTES
I.Identifying and Recognizing Opportunities
* Material following the opening feature on BrainReactions.
- An opportunity is a favorable set of circumstances that creates a need for a
new product, service, or business.
- An opportunity has four essential qualities: it is (1) attractive, (2) durable,
(3) timely, and (4) anchored in a product, service, or business that creates
value for its buyer or end user.
- For an entrepreneur to capitalize on an opportunity, its window of opportunity
must be open.
a. The term “window of opportunity” is a metaphor describing the time
period in which a firm can realistically enter a new market.
- It is important to understand that there is a difference between an opportunity
and an idea.
a. An idea is a thought, impression , or notion. It may or may not meet the
criteria of an opportunity. This is a critical point because, as we noted in
Chapter 1, many businesses fail not because the entrepreneurs that started
them didn’t work hard, but because there was no real opportunity to begin
with.
* Now, let’s look at the three ways to identify an opportunity
- Observing Trends – The first approach to identifying opportunities is to
observe trends and study how they create opportunities for entrepreneurs to
pursue.
1. Economic Forces
a. Economic forces affect consumers’ level of disposable income.
Individual sectors of the economy have a direct impact on consumer
buying patterns.
b. For example, a drop in interest rates typically leads
to an increase in new home construction and furniture sales.
2. Social Forces
a. An understanding of the impact of social forces on trends and how
they affect new product, service, and business ideas is a fundamental
piece of the opportunity recognition puzzle.
b. The persistent proliferation of fast-food restaurants, for example, isn’t
due primarily to people’s love for fast food but rather to the fact that
people are busy: the number of households with both parents working
remains high.
c. Some of the recent social trends that allow for new opportunities are
the following:
- Family and work patterns
- The aging of the population
- The increasing diversity of the workforce
- The globalization of industry
- The increasing focus on health care and fitness
- The proliferation of computers and the Internet
- The continual increase in the number of cell phone users
- New forms of music and other types of entertainment
3. Technological Advances
a. Given the rapid pace of technological change, it is vital for
entrepreneurs to remain on top of how new technologies affect current
and future opportunities.
b. Once a technology is created, products emerge to advance it. For
example, RealNetworks was created to add video capabilities to
the Internet.
c. Advances in technology frequently dovetail with economic and social
changes to create opportunities. For example, the creation of the cell
phone is a technological achievement, but it was motivated by an
increasingly mobile population that found many advantages to having
the ability to communicate with coworkers, customers, friends, and
family members from anywhere.
4. Political Action and Regulatory Changes
a. Political action and regulatory changes also provide the basis for
opportunities. For example, new laws create opportunities for
entrepreneurs to start firms to help companies comply with these laws.
- Solving a Problem
1. Sometimes identifying opportunities simply involves noticing a problem
and finding a way to solve it.
2. These problems can be pinpointed through observing trends and through
more simple means, such as intuition, serendipity, or chance.
3. Some business ideas are clearly gleaned from the recognition of problems
in emerging trends. For example, Symantec Corp. created Norton antivirus
software to rid computers of viruses. At other times, the process is less
deliberate. An individual may set out to solve a practical problem and
realize that the solution may have broader appeal. At still other times,
someone may simply notice a problem that others are having and think
that the solution might represent an opportunity.
- A serendipitous discovery is a chance discovery made by someone with a prepared mind.
- Finding Gaps in the Marketplace
1. The third approach to identifying opportunities is to recognize a need that
consumers have that is not being satisfied—by either large, established
firms or entrepreneurial ventures.
2. Large retailers compete primarily on price by serving large groups of
customers with similar needs. They do this by offering the most popular
items targeted toward mainstream consumers. While this approach allows
the large retailers to achieve economies of scale, it leaves gaps in the
marketplace.
a. This is the reason that small clothing boutiques and specialty shops
exist. The small boutiques, which often sell designer clothes or
clothes for hard-to-fit people, are willing to carry merchandise that
doesn’t sell in large enough quantities for Wal-Mart or JC Penney to
carry.
3. There are also gaps in the marketplace that represent consumer needs that
aren’t being met by anyone (Curves International example).
- Personal Characteristics of the Entrepreneur – Researchers have identified
several characteristics that tend to make some people better at recognizing
opportunities than others.
1. Prior Experience. Several studies show that prior experience in an industry
helps entrepreneurs recognize business opportunities.
a. Once an entrepreneur starts a firm, new venture opportunities become
apparent. This is called the corridor principle, which states that once an
entrepreneur starts a firm, he or she begins a journey down a path where
“corridors” leading to new venture opportunities become apparent.
2. Cognitive Factors – Opportunity recognition may be an innate skill
or a cognitive process.
a. There are some who think that entrepreneurs have a “sixth sense” that
allows them to see opportunities that others miss. This sixth sense is
called entrepreneurial alertness, which is formally defined as the ability
to notice things without engaging in deliberate search.
3. Social Networks – The extent and depth of an individual’s social network
affects opportunity recognition.
a. People who build a substantial network of social and professional
contacts will be exposed to more opportunities and ideas than people
with sparse networks. This exposure can lead to new business starts.
4. Creativity – Is the process of generating a novel or useful idea.
a. For an individual, the creative process can be broken into five stages, as
shown in Figure 2.4 in the textbook. The five steps are:
i. Preparation – Is the background, experience, and knowledge that an
entrepreneur brings to the opportunity recognition process.
ii. Incubation - Is the stage during which a person considers an idea or
thinks about a problem; it is the “mulling things over” phase.
iii. Insight – Insight is the flash of recognition – when the solution to a
problem is seen or an idea is born.
iv. Evaluation – Is the stage of the creative process during which an
idea is subjected to scrutiny and analyzed for its viability.
- Elaboration – Is the stage during which the creative idea is put into
a final form. The details are worked out, and the idea is transformed
into something of value.
II.Techniques for Generating New Business Ideas
- Brainstorming
1. Is used to generate a number of ideas quickly. It is not used for analysis or
decision making.
2. A brainstorming “session” is targeted to a specific topic about which a
group of people are instructed to come up with ideas.
3. The number one rule of brainstorming is that no criticism is allowed,
including chuckles, raised eyebrows, or facial expressions that express
skepticism or doubt. Criticism stymies creativity and inhibits the free
flow of ideas.
- There are two reasons brainstorming generates ideas that might not
arise otherwise.
i. First, because no criticism is allowed, people are more likely to
offer ideas than they would in a traditional setting.
ii. Second, brainstorming focuses on creativity rather than evaluation.
- Focus Groups
1. A focus group is a gathering of 5 to 10 people who are selected because of
their relationship to the issue being discussed. Although focus groups are
used for a variety of purposes, they can be used to help generate new
business ideas.
2. The strength of focus groups is that they help companies uncover what’s
on their customers’ minds through the give-and-take nature of a group
discussion. The weakness is that because the participants do not
represent a random sample, the results cannot be generalized to larger
groups.
- Surveys
1. A survey is a method of gathering information from a sample of people.
The sample is usually just a fraction of the population being studied.
2. The most effective surveys sample a “random” portion of the population,
meaning that the sample is not selected haphazardly or only from people
who volunteer to participate.
3. The quality of survey data is determined largely by the purpose of the
survey and how it is conducted.
4. Surveys generate new product, service, and business ideas because they
ask specific questions and get specific answers.
- Other Techniques
1. Customer advisory boards. Some companies set up customer advisory
boards that meet regularly to discuss needs, wants, and problems that may
lead to new ideas.
2. Day-in-the-life research. Other companies conduct varying forms of
anthropological research, such as day-in-the-life research.
3. IDEO Method Cards. IDEO Method Cards (which look like a deck of
playing cards) show 51 of the methods that IDEO uses to come up with
new product and service ideas.
4. Other. Some companies attend trade shows, conferences, and gatherings
of industry personnel. They use these events as intelligence missions to learnwhat their competition is doing and then use the information to stimulatenew product or service ideas.
III.Encouraging and Protecting New Ideas
- Establishing a Focal Point for Ideas
1. Some firms meet the challenge of encouraging, collecting, and evaluating
ideas by designating a specific person to screen and track them.
2. Another approach is to establish an idea bank, which is a physical or
digital repository for storing ideas.
a. An example of an idea bank would be a password-protected location on
a firm’s intranet that is available only to qualified employees. It may
have a file for ideas that are being actively contemplated and a file for
inactive ideas.
- Encouraging Creativity at the Firm Level
1. An employee may exhibit creativity in a number of ways, including
solving a problem or taking an opportunity and using it to develop a new
product or service idea.
2. Although creativity is typically thought of as an individual attribute, it
can be encouraged or discouraged at the firm level.
3. Table 2.3 in the textbook provides a list of actions and behaviors that
both encourage and discourage creativity at both the organizational
level and the individual supervisor level.
- Protecting Ideas from Being Lost or Stolen
1. Intellectual property is any product of human intellect that is tangible but
has value in the marketplace. It can be protected through tools such as
patents, trademarks, copyrights, and trade secrets.
2. As a rule, a mere idea or concept does not qualify for intellectual property
protection; that protection comes later when the idea is translated into a
more concrete form.
3. At the opportunity recognition stage, however, there are three steps that
should be taken when a potentially valuable idea is generated:
a. Step 1: The idea should be put into tangible form – either entered into
a physical idea logbook or saved on a computer disk.
b. Step 2: The idea, whether it is recorded in a physical idea logbook or
saved in a computer file, should be secured.
c. Step 3: Avoid making an inadvertent or voluntary disclosure of an idea
in a way that forfeits your claim to its exclusive rights.
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
What Went Wrong?
Planet Hollywood: An Idea Instead of an Opportunity
1. / Evaluate Planet Hollywood’s idea on all four dimensions of an opportunity. On a scale of 1-5 (5 is high), how does the idea that was launched as Planet Hollywood rate on each of the four dimensions?Answer: The answers to this question will vary. Most students will rank Planet Hollywood a 2, 3, or 4 (on the 1-5 scale) on each of the four dimensions of an opportunity—with a rating of 2 or 3 more common than 4. Even if Planet Hollywood was able to accomplish everything it hoped to do, it’s unclear how strong the opportunity would have been.
2. / If you have dined at Planet Hollywood, describe your experience. What is your reaction to the food? Did your dining experience create value for you? If you have not dined at one of these units, find a friend who has done so and ask these questions.
Answer: If you don’t have students who have dined at Planet Hollywood or know someone who has, ask them to spend some time looking at Planet Hollywood’s Web site, and imagine what dining at Planet Hollywood would be like. Also, ask them how much it would add to their dining experience if they actually saw a movie star at the restaurant. This was Planet Hollywood’s original lure, which never panned out, as explained in the feature.
3. / When Planet Hollywood first started to struggle, what could the founders have done to try to revitalize the chain?
Answer: Most students will say that Planet Hollywood should have done two things: (1) improved the quality of the food, so people at least didn’t leave the restaurant thinking they had overpaid for the food they received, and (2) found a way to get celebrities to show up at the restaurants on a consistent basis.
4. / Are you surprised that Planet Hollywood turned out to be more of an idea than an opportunity? What, if anything, could the founders of the firm have done to create a different outcome?
Answer: Most people are not surprised that Planet Hollywood turned out to be more of an idea than an opportunity. Themed restaurants are often over-hyped, and Planet Hollywood was no exception. In addition, it seems somewhat naive, in retrospect, that a large number of celebrities would show up at these restaurants. When that didn’t happen, on a consistent basis, it was hard for Planet Hollywood to deliver on its basic promise to its patrons. What the founders could have done differently, as articulated in the answer to the question above, is to (1) improve the quality of the food served in the restaurants, so people at least didn’t leave thinking they had overpaid for the food they received, and (2) find a way to get celebrities to consistently show up at the restaurants.
Savvy Entrepreneurial Firm
Getting High-Quality Advice on Emerging Trends
1. / What disadvantages might an entrepreneurial firm experience by relying on outside firms for understanding emerging trends? Are some of these disadvantages more relevant in the short term while others are more relevant for the long term?Answer: Although outside firms, like Gartner and Yankee Group, do meaningful research, most of the research they do is done with large firms in mind. As a result, the data that is generated may not be as relevant for smaller entrepreneurial firms. In addition, entrepreneurial firms are often trying to do something new or trying to tap into a new market niche. Firms like Gartner are usually better equipped to study existing markets that make forecasts for emerging or new markets. The later disadvantage is more relevant in the short term than the long term. Once a market is established, research firms are very good at collecting data to try to better understand market trends.
2. / What options do entrepreneurs have for finding less expensive ways to collect the type of material supplied by a firm like Forrester Research or Gartner?
Answer: There are many free or low-cost alternatives to obtaining research through a firm like Forrester Research or Gartner. Some suggestions are as follows:
- Reference librarians, particularly at college, university, or large public libraries, are often very helpful in providing entrepreneurs assistance in conducting industry research;
- There are many Web sites, which can be accessed for free, that provide industry related information;
- Small Business Development Centers;
- SCORE chapters;
- Talking to other entrepreneurs.
3. / When might it be essential for entrepreneurs to rely on material provided by an outside firm rather than their own analysis?
Answer: It may be particularly important to utilize the services of an outside firm if the information a firm needs to make critical decisions isn’t available through the alternatives mentioned in the answer to question #2. Also, sometimes it’s necessary to have objective data, collected by a respected thirdparty, to prove a point. For example, it’s more compelling to say that Forrester Research has determined that a neighborhood of 1,000 homes can support a coffee restaurant (for example) than to say that you determined that number yourself. Forrester Research has more of a level of legitimacy and objective detachment than an individual entrepreneur. It’s up to the entrepreneurs to decide if buying the research is cost-effective.
4. / Is it possible for aspiring entrepreneurs to become overwhelmed by the rapid pace of environmental change? What advice would you offer to the person believing that change is too difficult to predict and understand?
Answer: Yes, it is possible for aspiring entrepreneurs to become overwhelmed by the rapid pace of environmental change. Although it’s easy to start believing that change is too difficult to predict and understand, these types of sentiments are typically an overreaction. An entrepreneur should study the environment surrounding his or her firm on a consistent basis, and make changes when needed or when a competitive advantage can be achieved by changing first.
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